tv Bloomberg Real Yield Bloomberg April 20, 2019 11:00pm-11:30pm EDT
♪ jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, getting a mixed read on the u.s. economy. retail sales looking good, services data disappointing. add in some signs of weakness in europe. german manufacturing struggling to bounce back. all of the uncertainties bringing a did back to government bonds. 10 year bund yields heading back toward zero. we begin with the big issue, struggling to get a read on the global economy. >> china, europe. >> the eurozone. >> the u.s..
>> china forming a bumpy bottom. >> close to a recovery. >> data is encouraging. >> encouraging. >> europe has many existential issues. >> structural hurdles. >> structural problems in europe. >> too many to name. >> disappointed this year. it has been worse than expected. >> pretty weak data. >> this year worse than people expected. >> so awful over recent months. >> the u.s. economy is doing well. >> a strong u.s. economy. >> the u.s. is not doing poorly. >> the u.s. economy may be stuck here. >> it is a sequencing, the u.s. was stable last year. there is a pass off to china and improvement occurring in china. and europe is also stabilizing at the moment. jonathan: a big week for economic data worldwide and to discuss joining me around the table priya misra, gorshon distenfeld, and victoria fernandez. victoria, let's begin with you, your take. we have had u.s. retail sales, data out of china, and eurozone pmi. what is your conclusion this week?
victoria: i think we did get a mixed bag as the people on the clip were sayighere we are still going to have positive momentum in the second long-term investors that is what we're looking at. you had positive numbers out of china. you had retail sales doing better. gdp was where they expected, industrial production was good. you are setting that up. you are seeing the stimulus finally starting to feed through, and beijing is probably not done yet. we will continue to see measures put in place. so that is going to be positive, and you should have that feedthrough mechanism to go through to other em's, especially those with the supply chain, vietnam, taiwan. and then again into europe. germany really needs china to do well. hopefully having this turnaround will help some of the european numbers. priya: i would agree with victoria. i think what we saw the last two weeks is the u.s. economy is growing around trend. so let's say around 2% gdp. the china data has come in better.
europe is still a laggard here, but what this is telling us is that the fed and other global central banks have managed to extend the cycle. so i think the big fear or something the market was grappling with is has the fed extended the cycle? or did they just signal the cycle has ended? the fact that the data is telling you growth is ok, particularly in the u.s., and china growth is picking up, therefore we should back in the reach for carry trades. so this divergence between rates as well as risk assets, the fact that rates have broken out to is upside a little bit telling you that risk assets are ok. gershon: i agree with everything that was said so far. i will add there seems to be some natural law that we have to be toward the end of the cycle, as if it is a baseball game in and the third out in the ninth inning, the game is over. that is not the case. we were talking before that australia has been expanding for
30 years, china, indonesia, korea, india. you can go on and on. there is no natural limit. the fed is off the table. they're willing to let inflation run hot if need be. they will not take the punch bowl away. jonathan: take the punch bowl away. >> i think the fears in europe -- no one is going to say europe will be gangbusters in growth. countries like germany are much bigger exporters than the u.s. some of the consumer numbers are not consistent with going into recession. do we expect strong growth there? no, but this idea we are going into worldwide depression is overblown. jonathan: a few dynamics we will work our way through. let's start with united states and the idea that we are late cycle. victoria, i would love your insight into this. there are so many people who believe we are late cycle. and when you ask them why, they will tell you it is because it has been going on for a long time. can you define late cycle by duration and duration alone? victoria: no. you can't. it's like what you were saying a moment ago, it can go on for a iod of time.per
with the central banks where they are, the federal reserve on pause, you had india cut rates, you have a situation where things can continue for a longer period of time. there is no set timeline on how long this has to be as long as you have fiscal policy and monetary policy situated in a place where it can continue to boost that, then i think you can keep going. priya: i completely agree. historically, the fear is business cycles don't die of old age, they are murdered are the fed. if you look at real rates, 10 year real rates hit 1.2% late last year. i'm nervous that if the fed continues hiking or let the balance sheet runs off, if real real rates continue to rise, the economy can't just handle it. they will not go above neutral and then they stop the bank sheet run-up. that has taken these much lower. they are not trying to murder the economy. they might be able to achieve
what no other fed has been able to do, which is essentially not really murder the business cycle here. jonathan: let's talk about what is happening with treasury yields. it has been interesting. the fed has backed away. the data looking ok in the united states. yet we still cannot unlock materially higher treasury yields, both in terms of nominal and in terms of real yield. what are your thoughts? gershon: the market is saying they do not believe the fed will be able to generate inflation. it is pretty clear. you would expect, if we were to go into a recession and the fed would start to raise, the short end would be rallying more than it is. jonathan: yeah. >> you have the short end rally or the long end selloff. we are going to need to see some inflation. i will say i just as bullish as am the others, but it is not like there are not risks out there. much like in the fourth quarter, everything was terrible, the world was falling apart, we could do nothing right. it is not 100% rosy. we do not have a finalization on the trade deal yet. europe is still, despite not as
being as bad as people think, it is not rosy over there. we need central banks to keep doing what they are doing. there is always the unexpected we don't know about. jonathan: let's talk about the gravitational pull of the rest of the world. >> right. jonathan: we still a positive real yield in the united states and i wonder if that is an incentive to go lower for a lot of people out there. in germany, you do not have positive real yields. you have negative yields across the eurozone. is that where we get this sucking sound for the u.s. treasury yields, from everywhere else? priya: even though we are not looking for the economy to slow down from here, we are looking for over 2% gdp. if the 10 year in europe is really stuck around zero, how high can that spread go? if the fed is done hiking, then how far can it go? if the front end is going to be anchored around 2.40, i think the long end for the 10 year will struggle to go above 2.75.
jonathan: victoria, i want your view. you can be constructive on the economy. you can be very constructive on the u.s. economy. it does not mean you are as bearish on treasuries, does it? victoria: no, there are uncertainties out there. as you said, they are out there. we are not looking through rose-colored glasses. there are things keeping rates lower. besides the fed saying they are on pause, you do have the global issues that are pulling things down. look at the spread between bunds and u.s. treasury. that has come in a little bit, we were at 250 last week and we are in the 235 range now. that has come in. there are going to be uncertainties, whether headlines from north korea, that could be a pullback. you have a flight to quality because you're going into a long weekend. we still have the china trade issue, brexit is still there, we don't know if we will get a hard brexit or not and we will not know that until later in the year. there are a lot of issues still keeping these yields lower. and we have to be careful. we have seen huge inflows into
investment grade and munis over the last couple weeks. people like to go in when yields are low. and so we need to be a little careful and make sure you position yourself properly so if we see yields go higher, you are prepared for that. jonathan: let's talk about one of those risks. just a base case for a lot of people is china improves as the year goes older. i will take with that. i will go with that. fine. they keep pushing stimulus. the nature of stimulus has changed. i wonder because the nature of the newness has shifted, whether the degree of the spillover has changed? take the eurozone pmi. some people take comfort that in germany it will take a while to get there. but what if it does not get there at all because the stimulus china has put into the economy will not be enough to get the degree of spillover we are used to? >> i think you are touching on what we have been talking about, what does it all mean in terms of portfolios? what should a fixed income investor do? that is the purpose of the show,
right? jonathan: absolutely. lisa: we tend to lump fixed income into one bucket. it is more important than ever to balance the credit risk you take, whether u.s. high yields, high yields,ropean and your rate risk. interesting fact, if you just balance those risks equally you end up getting 80% of the yield of the high-yield market and much less volatility. priya: i would agree with that. when the curve is flat, when spreads are tight, when volatility is low, we have to do far more fundamental credit work. also balance our liquidity risk. if you are in a risk asset portfolio, having some duration is a nice hedge. but i think some of those easy carry trades where you can just that isfive-year rates, all gone. i would say maybe a portfolio makes more sense than if we were late cycle to be buying high-yield, for example. jonathan: final word. we are looking at short to medium term maturities in a
portfolios right now. we take a conservative approach. whether tax-free or taxable. we are looking at higher quality issues. when you look at spreads this year, higher quality issues have come in more than a high yields. they are still 30 or 40 basis points higher than the levels we saw at the end of last year. i would be a little leery of as we get more of a risk-all trade, seeing 10 year come down. i would stick to more investment grade, high-quality short to intermediate-term bonds. that is what we looking for in our portfolios. jonathan: my guests sticking with us. coming up, the auction block. softbank's record sale seeing heavy demand is the company sells $4.5 billion in bonds on day one. that conversation is coming up next. this is "bloomberg real yield." ♪
♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to head to the auction block, where we begin in the united states. and incorporates with walmart. the spotlight in the u.s. high grade market. the box retailer issuing $4 fouron of death across tranches. its first debt sale this year. proceeds going to general corporate purposes including maturing debt. in asia, softbank selling japan's biggest ever corporate bond. $4.5 billion of notes maturing in april of 2025. the offering was fully subscribed on the first day as the pricing attracted strong demand. and in europe, germany selling 25 year bunds this week. 776 million euros were sold at a yield of 2.5% with investors offering to buy more than two times the amount of security
sold. let's start with europe. priya, you have an interesting call on the periphery i want to explore with you. it is the idea that after years of behaving like credit, the periphery can start behaving like a sovereign again. walk us through it. priya: the biggest reason the periphery traded like credit was this redenomination risk. the idea the eurozone can break up. i think draghi and the ecb have put an end to that. i think that should get priced out. that is already getting priced out. the other thing is on the ecb. they have told us they are not hiking until the end of the year. they have done the tltro programs. they are going to help the periphery. what they are trying to do is extend the cycle as much as they can in europe. european growth is weak. i think there are big structural issues with europe. if there is a reach for yield in europe, where do you go? you are at zero in bonds. you want to go into the periphery. i think the periphery spreads
will continue to tighten. gershon: we tend to do with the extremes. it is sovereign or all risk, but in reality it is somewhere in between. there are idiosyncratic issues. for example, italy, a lot of populism. there are debt problems. all of these economies are susceptible to the region in general. so you have to pay attention to both. this will be a systematic component that goes along with how the european economy goes. then there will be some idiosyncratic components with how the individual countries work out their issues. jonathan: victoria, your thoughts? victoria: you and i have spoken before when it comes to europe, how we feel there are a lot of things going on particular to the individual countries. it is not all about china or about global growth slowing down. you have auto manufacturing and protests in france, political issues in italy. so these things have to take a backseat before we see things get better. we did see pmi services get better in germany. france was pretty solid.
i think there are bits and pieces that can see a turnaround , but it will be a long time coming. jonathan: is there risk that we are trying to infer some kind of structural signal from price when there could just be a monster reach for yield across the continent? gershon: there is always that chance. you showed it in the opening, the walmart deal. the demand for that is probably more than we scared everyone to thinking bbb's will get downgraded. when most of them are traded as if they will get downgraded. so there is not only a reach for yield in high yield and e.m. because people need a lot of income, even in the lower yield, we are scaring people and crowding them out of stuff that is priced as if it has problems already. people are changing higher quality stuff jonathan: being fearful of credit risks has some pain through 2019. you said to me that high-yield could return 10% and i laughed, so more fool me.
walk me through what is going on next. we have had big price moves. we have had 8% or non-percent on high-yield. we have had a big move. what now? gershon: the reason we can get to 10% return is because we started at much higher yields. now we are in a carry environment. again, we have to be balanced. we're not going to go in to recession. were not to have outsized defaults, but we are also not trading at the it is unlikely. levels we were in the fourth quarter. we need moderation. that's why it is so important to not only load up on the riskiest bonds. don't put all of your portfolio in high-yield. balance it out with some of the higher quality stuff. that will work together in the portfolio. jonathan: you are making the same point, aren't you? priya: i would agree. in just the rate space, i would say you're getting paid for duration risk. i would stay in the front end. if you have a risk portfolio, the front end does not help you. it gives you liquidity but it is not a good hedge. so if you have a risk portfolio, owning makes sense. particularly at the 2.60 level. that will be a huge inability for the u.s. 10 year to go much higher. that is a decent level. two weeks ago, when the 10 year was at 2.35, that that was
really pricing in the recession risk. at that point i found it odd that credit spreads were still tight. if we go back to 2.35, i think here owning some 10 make sense. jonathan: victoria? your thoughts? victoria: the one thing we need to speak about is the demand. the demand is out there, whether for municipal bonds because of salt and tax reasons, corporate bonds, because the demand is there and the supply has shrunk. we are 30% less issuance than in 2018. that will put some pressure on --excuse me -- spreads excuse me. they keep coming in tighter. jonathan: you need to get some water. take a break. my guests will be sticking with us. in the markets, a check on treasuries. twos, tens, and 30's.
♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up next week, larry kudlow speaking at the national press club in d.c. and plenty of central-bank action, including rate decisions out of canada, turkey, indonesia, and the bank of japan. the week wrapping up with u.s. gdp on friday. my guests still with us. and joining us from texas, too. i want to begin with this line we got from blackrock's larry fink earlier this week. he was forecasting a melt up on
the earnings call. he was referring to equities and he said there are huge money sitting on the sidelines. clients are underinvested, not over invested. we see more upside, especially in equities. does that apply to credit as well? or is that just the stock story? does that apply to fixed income? it took a lot of inflows on the fixed income inside at blackrock through the quarter. >> fixed income has gotten the inflows. the lowest risk asset have got most of those inflows. the fed told us they are done with hiking. i think people felt more comfortable about fixed income, but in the last couple of months, there has been this fear they were going from goldilocks to a recession. if you're nervous about that and the fed is not hiking, you put your money in the front end. so money market fund inflows have been extremely high. that is not investing in the riskiest assets, so i see where he is coming from. gershon: as much as i hate to agree with larry fink, he is right. and his results show it. people put a lot of money into passive funds.
but that does show people are not investing enough in risk assets. in equities and other risk assets. i do not think that is anything new. how many studies have to be done to show the s&p returns 11%. the average investor gets 3% or 4% of it. they consistently buy high and sell low. everyone was so nervous in the fourth quarter last year with selling. now are up on the s&p year to date. people are chasing it. jonathan: let's explore this a little further. the belief people will re-risk and begin to participate as the year progresses, any faith in that idea? victoria: we believe that is true. as you have uncertainties get removed from the marketplace, that is going to give investors the opportunity to come back in. you will see on the equity side, especially with earnings doing as well as they are doing, beating the expectations, for the most part. you will see if there. but that gives an opportunity on the fixed income side. it allows investors to look at their portfolio allocation, see their where they need some diversification. we saw flows out of fixed income last year. we are seeing them come back in
this year, especially this past month. jonathan: yeah. >> so we will see flows common. jonathan: what will drive capitulation, price or better data? gershon: people chase returns. you see it empirically. you see it in study after study. people chase returns. priya: i would add, if it is a more dovish reaction function, the data starts improving, inflation does not pick up a lot and the fed does not talk about more hikes, i think that results in that, and people realize there will not be any hikes than the cycle can extend. jonathan: let's get to the rapidfire round. three quick questions. three quick answers. i asked this once before. i will ask it again -- have we seen the low for the year on the german ten-year yield? have we are ready seen it, yes or no? priya: yes. gershon: no. victoria: no. jonathan: big rally on the periphery in europe? including greece. do you buy it or fade it?
priya: buy it. gershon: fade it. victoria: fade it. jonathan: the bank of america research team says the rally of in ccc's is inevitable. we will get another leg higher. they say don't chase it. do you fade it or chase it? priya: chase it. gershon: cautiously chase it. jonathan: victoria? victoria: i will fade it. too risky for us. jonathan: fantastic to catch up with all of you. fantastic stuff. that does it for us from new york. we will see you next friday at 1:00 new york time. p.m. that is 6:00 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪
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